Westwood Holdings Group, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Westwood is an asset-management and trust-services holding company operating through Westwood Management, Salient Advisors and Westwood Trust. Revenue is primarily based on assets under management or advisement. This filing covers the fiscal year ended December 31, 2022, with comparisons to 2021 and 2020.
On November 18, 2022, Westwood acquired substantially all of the asset-management business of Salient Partners, adding energy infrastructure, tactical absolute return, real estate and private-investment capabilities, as well as related broker-dealer and investment-adviser entities.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $68.7 million | $73.1 million | Down 6% |
| Net operating income (loss) | $(4.9) million | $6.0 million | Declined |
| Income (loss) before taxes | $(5.2) million | $14.0 million | Declined |
| Net income (loss) | $(4.6) million | $9.8 million | Declined |
| Diluted EPS | $(0.59) | $1.23 | Declined |
| Economic Earnings, non-GAAP | $3.6 million | $17.5 million | Down 80% |
| Operating cash flow | $51.5 million | $19.4 million | Increased |
| Cash and short-term investments | $39.2 million | $80.2 million | Decreased |
| Debt | None | None | No change |
Asset-based advisory fees increased 2% to $46.7 million, but performance-based advisory fees fell 69% to $1.0 million and trust fees declined 10% to $21.7 million. Total expenses increased 10% to $73.6 million, including $7.1 million of Salient acquisition costs.
Net margin was approximately negative 6.7% in 2022, compared with approximately 13.4% in 2021. The 2022 effective tax rate was 10.9%; the filing reports a tax benefit of $0.6 million despite the pretax loss.
Assets, liquidity and capital allocation
- Total AUM was $14.8 billion at December 31, 2022, up 2% from $14.5 billion. AUA was $1.3 billion, compared with $0.3 billion in 2021.
- Firm-wide AUM and AUA totaled approximately $16.1 billion at year-end.
- Average quarterly AUM decreased 9% to $13.1 billion, primarily due to approximately $1.5 billion of market depreciation.
- 2022 AUM reflected $2.7 billion acquired from Salient, $1.5 billion of market depreciation and $0.9 billion of net client outflows.
- Cash flow from operations was $51.5 million, substantially reflecting the sale of investments used to fund the Salient transaction; it should not be viewed solely as recurring operating earnings.
- The Salient transaction required $35.0 million of upfront cash, with potential subsequent payments of up to $25.0 million based on revenue retention and growth targets.
- Westwood paid $5.6 million of dividends and repurchased 205,521 shares for approximately $2.9 million during 2022. The quarterly dividend was $0.15 per share.
- Westwood Trust had approximately $21.2 million in excess of its $4.0 million minimum restricted-capital requirement.
Material changes versus the prior comparable period
- Revenue declined despite higher year-end AUM because average AUM was lower, trust fees decreased and performance fees were materially lower.
- The Company moved from 2021 net income of $9.8 million to a 2022 net loss of $4.6 million, primarily due to lower revenue, acquisition expenses and higher post-acquisition costs.
- Salient contributed $3.1 million of revenue and $0.1 million of net loss from the November 18 closing through year-end. Pro forma revenue, assuming ownership for all of 2022, was $95.1 million, but pro forma results are unaudited and exclude one-time acquisition costs.
- Goodwill increased by $19.3 million and intangible assets increased by approximately $17.0 million as a result of the Salient acquisition. Acquisition-date contingent consideration was recorded at $12.9 million.
- Investment balances declined sharply, with current investments at fair value falling to $15.3 million from $65.0 million, largely reflecting investment sales used to fund the acquisition.
- On January 1, 2023, Westwood acquired an additional 31.2% of Broadmark for $1.6 million, increasing ownership to 78.7% and creating a controlling interest for consolidation purposes. Purchase accounting had not been finalized as of the filing date.
- BDO USA LLP replaced Deloitte & Touche LLP as independent registered public accounting firm in April 2022. The filing reports no disagreements or reportable events with either auditor.
Guidance, outlook, commentary and risks
Management did not provide numerical earnings or revenue guidance. Its stated strategy is to leverage Salient’s broader product range and distribution capabilities, grow existing strategies and intermediary channels, enhance digital capabilities, expand wealth management and pursue additional strategic transactions.
Management expects existing cash, short-term investments and operating cash flow to fund ordinary operating and capital requirements for at least the next twelve months, while noting that additional financing could become necessary. The Company had no debt and no material off-balance-sheet arrangements.
- Results remain highly sensitive to market values and composition of AUM; management estimates that a hypothetical 10% decline in average AUM would have reduced 2022 revenue by approximately $7 million.
- Client agreements are generally terminable on short notice, and the ten largest clients represented approximately 22% of fee revenue.
- Competitive fee pressure, increased use of passive products, investment underperformance and client redemptions could reduce revenue and margins.
- Salient earn-outs depend on revenue retention and growth and are subject to valuation uncertainty; changes in projections, volatility or discount rates could materially change the liability.
- The Company is exposed to acquisition-integration, key-employee retention, regulatory, litigation, cybersecurity, vendor, technology and reputational risks.
- Dividends are discretionary and depend on operating results, liquidity, capital needs, legal restrictions and distributions from subsidiaries. Future shareholder distributions may include a return of capital.
- The Company’s internal controls over financial reporting were assessed as effective by management, but Salient was excluded from the assessment for the permitted post-acquisition period. Salient represented approximately 5% of revenue and 33% of consolidated assets at year-end.
Most important facts for investors to verify
- Whether Salient meets revenue-retention and growth targets and the resulting cash or equity earn-out payments, capped at $25.0 million.
- Whether Salient and the January 2023 Broadmark acquisition generate sustainable revenue growth and synergies after integration costs.
- Recurring operating cash generation excluding investment sales and other working-capital effects.
- Trends in average AUM, net client flows, investment performance and fee rates, especially in institutional and wealth-management channels.
- The sustainability of the $0.15-per-share quarterly dividend and the extent to which future distributions could represent return of capital.
- Valuation and impairment risk related to acquired goodwill, client relationships, trade names, non-compete agreements and contingent consideration.
- Potential effects of market declines, passive-investment competition, client concentration, regulatory developments and cybersecurity incidents.